Madras H.C : Whether, on the facts and in the circumstances of the case, while computing the profits under s. 41(2) for the asst. yr. 1978-79 the depreciation allowed to the firm prior to the reconstitution on 28th May, 1976 should also be taken into account?

Counsel Appeared

C.V. Rajan, for the Applicant : None, for the Respondent

JUDGMENT

THANIKKACHALAM, J. :

At the instance of the Revenue, the Tribunal referred the following question for the opinion of this Court, under s. 256(1) of the IT Act, 1961, hereinafter referred to as the ‘Act’ :

“Whether, on the facts and in the circumstances of the case, while computing the profits under s. 41(2) for the asst. yr. 1978-79 the depreciation allowed to the firm prior to the reconstitution on 28th May, 1976 should also be taken into account?”

The assessee is a firm. One of the partners died on 28th May, 1976 and immediately thereafter the firm was reconstituted. In the previous year ended 31st March, 1976 the assessee had transferred five assets in favour of four partners and a stranger. In computing the profits under s. 41(2) of the Act, the ITO took into account the depreciation deducted in the assessment made on the firm prior to the reconstitution also, in the view that the death of the partner led only to a change in the constitution and there was no succession of one firm by another.

On appeal, the AAC held that, in computing the profits under s. 41(2) of the Act, only the deductions granted to the assessee firm could be taken into account and not deductions granted to the dissolved firm. On further appeal also, the Tribunal confirmed the order of the AAC. Since, after the death of a partner, the firm would get dissolved, unless there is a contract to the contrary. In CIT vs. Empire Estate (1996) 132 CTR (SC) 221 : (1995) 218 ITR 355 (SC), the Supreme Court held that the firm was dissolved on the death of a partner and the surviving partners did not continue the business. While so, the depreciation granted in the hands of the erstwhile firm cannot be includible under s. 41(2) of the Act along with the deduction granted to the newly constituted firm. Therefore, the Tribunal was correct in holding that while computing the profits under s. 41(2) of the Act, the depreciation allowed to the firm prior to the reconstitution on 28th May, 1976, should not be taken into account. Accordingly, we answer the question referred to us in the negative and against the Department. No costs.

[Citation: 236 ITR 454]